THE ECONOMICS OF IDLE PUBLIC FUNDS POLICIES: A RECONSIDERATION: ABSTRACT

Interest revenues earned from the investment of idle funds have become an important source of funds for state and local governments in recent years. A few writers have argued against efforts to maximize the direct yield on these inactive cash balances, basing their position on considerations of equitable treatment of local banks and the presumed impact on loanable funds in the region. The analysis in this paper suggests that these arguments are fallacious, that the maximization of interest revenues on idle public funds is an entirely proper policy goal, and that optimality in the employment of inactive public cash holdings does not preclude investing the funds outside the area of their origin.